HOW INFLATION AFFECTS REAL ESTATE INVESTMENTS

December 23, 2021 0 comment

Written By: Eric Davis

Inflation is the rate of increase in prices over a given period of time.

We have all been hearing the news that inflation has hit hard this year, and it has changed the direction of almost all businesses in the country, including those based in Washington. Whether we are aware of it or not, inflation directly affects our daily lives, so it’s better to educate ourselves now to make informed decisions every time inflation numbers change.

What exactly is inflation, and why do we need to notice and base our business decisions on its movement?

Inflation is a business term that pertains to the overall general upward price movement of goods and services in an economy. However manageable the outcomes can be (an increase in the price of goods and services) it still includes negative aspects that are less obvious and can be overlooked. For instance, it directly affects the real estate market and housing costs, thus impacting the multiple financial factors involved in real estate investment for everything from commercial to single-family rentals.

Is inflation the only factor that we need to be aware of?

No, there are three possibilities of economic movement that directly affect our businesses. The first is when we experience high inflation. Second, there would be times when it is the exact opposite which we call deflation[1], and finally, the last of the trifecta, slow economic growth that can cause stagflation[2]. We must always be aware of the current economic trend to know which of the three are trending to plan accordingly.

Nobody can know for sure what will happen in the future. Still, it’s wise for professional real estate investors to learn the how’s and what’s in real estate inflation, what a high inflation market can mean for your resources or money, and the most effective way to navigate it. Even amidst the financial vulnerability brought on by the pandemic, countless consumers took homeownership more seriously than ever, resulting in a large but short hike in prices in the real estate market because of extremely decreased spending. In 2020, home sales progressed remarkably and outperformed 2019 levels proving that the real estate industry has been very strong this year, with a huge need for homes in most locations.

Seattle-region housing prices barely moved from August to September after soaring for months, indicating a seasonal downtrend in the local real estate market. Across the country, homebuyers searched out more space or new areas and sought to gain low home financing costs, resulting in housing markets all over the nation heating up early in the pandemic.

According to the data published at the beginning of this month by the Northwest Multiple Listing Service, the Puget Sound area observed a different trend: pending sales were dropping in October. The report shows 9,983 closed sales during October, which is fewer than the completed transactions a year ago (down 7.6%) and 3% lesser than September. The Seattle- region real estate market‘s overall downtrend is seasonal and can be associated with those reduced market prices together with a small increment in interest rates. Single-family home price increases have resulted in widespread housing inflation. Home costs will continue to climb more slowly, raising anxieties regarding affordability. High demand will keep supply depleted.

A graph showing Seattle’s rent prices.

Inflation has various real estate-related aftereffects, commonly including high-priced mortgage charges, increasing asset values, long-term debt devaluation, increased construction costs, and more. Real estate investors must be ready for increased expenses, referenced below. 

Inflation outcomes on real estate investment that should be considered:

  1. Home Construction Cost: Because things are costly during inflation, the price of materials used for construction will also rise. Building supplies have become expensive or difficult to get. This deficit will lead to additional vendor expenses.
  2. Home Prices: Since the price of construction supplies will be higher, building developers will consume more when constructing new properties. Generally speaking, when inflation rises, housing and other real estate asset values follow.
  3. Mortgage: Fewer consumers will fill a housing market when capital becomes costly to acquire due to higher loan rates. Inflation lessens currency’s value, forcing lenders to increase interest rates. It is normally done to cover the losses caused by inflation.
  4. Vendor Labor: Vendor rates are increasing due to employment shortages. Good and trustworthy vendors are challenging to find. Supply chain environments have been restless for several months, driving suppliers and manufacturers to hike prices for their clients.
  5. Household Equipment and Supply Item: The increasing expense of raw materials, higher shipping costs, fuel costs, service costs, etc., can result in customer price hikes. Appliances are low in stock — delivery is
  6. Turnover Costs: Over the past month, there has been a spike in rents, as seen in the Zumper prices report but due to the ongoing pandemic a lot of Seattle rental units have had to reduce rates to keep tenants. Turnover is most owners’ highest operating cost so, something to avoid with inflation.
  7. Property Insurance, Property Taxes, HOA Dues: Insurance and taxes are bound to rise as they are attached to your property’s value. The HOA can’t control inflation, of course. However, it can limit its impact on homeowners by limiting the need for assessments. Reserve funds can safeguard you from evaluations.

A picture showing a man weighing the pros and the cons.

To summarize statistics, we can tell that all of King County & Seattle continue to be a seller’s real estate market — still quite below what is expected to meet the current number of consumers right now. But Seattle remains a strong competitor in the real estate industry. Given the economic situation as of now, inflation is imminent. Learning the mechanisms of this event is important. Unlike most investments during inflationary periods, there are ways to position existing portfolios to result in positive returns. Contact Davis Property Management to determine the best options to create effective strategies to combat inflation. Call us at 425-658-7471 or email us at [email protected].

 


References:

[1] – https://en.wikipedia.org/wiki/Deflation

[2] – https://en.wikipedia.org/wiki/Stagflation

https://www.nwmls.com/News–Information/page/Buyer-hesitancy-sidelines-some-while-others-compete-for-scarce-housing-inventory

https://www.zumper.com/rent-research/seattle-wa

https://www.nwmls.com/library/corporatecontent/statistics/Breakouts_King.pdf

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